Working Paper: CEPR ID: DP8899
Authors: Anisha Ghosh; Christian Julliard
Abstract: Probably not. First, allowing the probabilities of the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected in both U.S. and international data. Second, the recorded world disasters are too small to rationalize the puzzle unless one assumes that disasters occur every 6-10 years. Third, if the data were generated by the rare events distribution needed to rationalize the equity premium puzzle, the puzzle itself would be unlikely to arise. Fourth, the rare events hypothesis, by reducing the cross-sectional dispersion of consumption risk, worsens the ability of the Consumption-CAPM to explain the cross-section of returns.
Keywords: calibration; cross-section of asset returns; equity premium puzzle; generalized empirical likelihood; peso phenomenon; rare disasters; rare events; semiparametric bayesian inference
JEL Codes: C11; C14; E17; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption data (D12) | equity risk premium (G12) |
| rare events do not sufficiently explain the EPP (D81) | consumption CAPM is rejected (E21) |
| reliance on rare events (D81) | explanatory power of the CCAPM (D11) |
| rare events hypothesis (D80) | equity premium puzzle (EPP) (G12) |